New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Channel Infrastructure NZ Ltd / Equity Bottom-Up

<h2>Refining NZ<br>Refinery Conversion Still in the Pipeline</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Refining NZ's (NZR) Strategic Review update upstaged its FY20 result, with news that BP has signed "in principle" terms, including import terminal fees, an unexpected bonus. Whilst NZR still has to agree terms with Z Energy (ZEL) and Mobil, it is an encouraging sign for shareholders and provides increased clarity on NZR's future path. That said, whilst our valuation range has narrowed, it is still relatively wide between NZ$0.35 and NZ$1.19/share. We retain our NEUTRAL rating.</p>
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<h3>Terminal conversion discussions ongoing, but progress being made</h3>
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<p>NZR's&nbsp;announcement that it has agreed "in principle" terms with BP&nbsp;to convert to an import terminal, including terminal&nbsp;and pipeline fees was the most positive news. Negotiations are ongoing with&nbsp;NZR's&nbsp;other key customers, ZEL&nbsp;and Mobil. We believe the announcement that BP&nbsp;has agreed terms will place additional pressure on ZEL and Mobil to complete negotiations, enabling all parties to move forward. If ZEL and Mobil agree terms before 31 March 2021, NZR should be able to convert&nbsp;to a terminal by mid-to-late 2022. Based on the BP&nbsp;terms, NZR has indicated import terminal revenue of ~NZ$100m is achievable, with cash earnings before interest and tax between&nbsp;NZ$65m and&nbsp;NZ$70m. The NZ$100m revenue figure is likely to be the maximum achievable, in our view, as ZEL and Mobil are unlikely to sign up to more favourable terms and it assumes a recovery in fuel volumes to ~90% of 2019 levels, which requires ~80% of jet fuel demand&nbsp;to have returned (vs. the current 30% to 40%).</p>
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<h3>Thinking about value&nbsp;— life as a terminal, with upside options</h3>
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<p>Whilst we have more clarity and our valuation range has narrowed to NZ$0.35–NZ$1.19/share (from NZ$0.05–NZ$1.60/share following the 1H20 result), there is still a high degree of uncertainty. Several issues remain unresolved/unknown including terminal and infrastructure fees,&nbsp; timing and scale of jet volume recovery and&nbsp;investor appetite for an asset such as NZR. If NZR executes well, there is value significantly above the current share price. However, given debt levels and the significant costs of conversion (estimated at ~NZ$200m), the valuation is very&nbsp;sensitive&nbsp;to small assumption changes.</p>
<p>On the positive side, there is value upside from&nbsp;crystalising&nbsp;and subsequently using tax losses from closing the refinery of ~NZ$350m, sale or alternative use of surplus land and third party use of the import terminal/pipeline.</p>
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<h3>FY20 result a remarkable performance given the circumstances&nbsp;— FY21 expected to be more of the same</h3>
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<p>In a very difficult year, NZR has performed extremely well. Few (including us) would have given NZR much chance of reducing debt levels after the COVID-19 pandemic hit. The -NZ$10m reduction in debt levels to NZ$230m is probably NZR's best achievement this year and is a testament to the business model and NZR's ability to quickly adapt to the new environment. Looking ahead, we expect NZR to be able to continue to operate on a cash neutral basis, until refinery operations cease, most likely in 2022. Our revised FY23 forecasts assume NZR has successfully converted to an import terminal.</p>
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<div><strong>Andrew Harvey-Green</strong></div>
<div><a href="mailto:andrew.harvey-green@forsythbarr.co.nz" target="_blank" rel="noopener">andrew.harvey-green@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 8185</div>
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<div><strong>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
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Refining NZ Refinery Conversion Still in the Pipeline

NEUTRAL
Refining NZ's (NZR) Strategic Review update upstaged its FY20 result, with news that BP has signed "in principle" terms, including import terminal fees, an unexpected bonus. Whilst NZR still has to agree terms with Z Energy (ZEL) and Mobil, it is an encouraging sign for shareholders and provides increased clarity on NZR's future path. That said, whilst our valuation range has narrowed, it is still relatively wide between NZ$0.35 and NZ$1.19/share. We retain our NEUTRAL rating.


Terminal conversion discussions ongoing, but progress being made


NZR's&nbsp;announcement that it has agreed "in principle" terms with BP&nbsp;to convert to an import terminal, including terminal&nbsp;and pipeline fees was the most positive news. Negotiations are ongoing with&nbsp;NZR's&nbsp;other key customers, ZEL&nbsp;and Mobil. We believe the announcement that BP&nbsp;has agreed terms will place additional pressure on ZEL and Mobil to complete negotiations, enabling all parties to move forward. If ZEL and Mobil agree terms before 31 March 2021, NZR should be able to convert&nbsp;to a terminal by mid-to-late 2022. Based on the BP&nbsp;terms, NZR has indicated import terminal revenue of ~NZ$100m is achievable, with cash earnings before interest and tax between&nbsp;NZ$65m and&nbsp;NZ$70m. The NZ$100m revenue figure is likely to be the maximum achievable, in our view, as ZEL and Mobil are unlikely to sign up to more favourable terms and it assumes a recovery in fuel volumes to ~90% of 2019 levels, which requires ~80% of jet fuel demand&nbsp;to have returned (vs. the current 30% to 40%).


Thinking about value&nbsp;— life as a terminal, with upside options


Whilst we have more clarity and our valuation range has narrowed to NZ$0.35–NZ$1.19/share (from NZ$0.05–NZ$1.60/share following the 1H20 result), there is still a high degree of uncertainty. Several issues remain unresolved/unknown including terminal and infrastructure fees,&nbsp; timing and scale of jet volume recovery and&nbsp;investor appetite for an asset such as NZR. If NZR executes well, there is value significantly above the current share price. However, given debt levels and the significant costs of conversion (estimated at ~NZ$200m), the valuation is very&nbsp;sensitive&nbsp;to small assumption changes.
On the positive side, there is value upside from&nbsp;crystalising&nbsp;and subsequently using tax losses from closing the refinery of ~NZ$350m, sale or alternative use of surplus land and third party use of the import terminal/pipeline.


FY20 result a remarkable performance given the circumstances&nbsp;— FY21 expected to be more of the same


In a very difficult year, NZR has performed extremely well. Few (including us) would have given NZR much chance of reducing debt levels after the COVID-19 pandemic hit. The -NZ$10m reduction in debt levels to NZ$230m is probably NZR's best achievement this year and is a testament to the business model and NZR's ability to quickly adapt to the new environment. Looking ahead, we expect NZR to be able to continue to operate on a cash neutral basis, until refinery operations cease, most likely in 2022. Our revised FY23 forecasts assume NZR has successfully converted to an import terminal.



Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Refining NZ: Refinery Conversion Still in the Pipeline